It may also offer hope that Treasury bill issuance will increase as the Federal Reserve pares back its balance sheet, as short-term investors struggle with a dearth of short-term debt supply.
Meanwhile, the Treasury is likely to indicate that it will ramp up Treasury bill issuance in the coming months as it makes up for declining purchases by the Fed, which is letting more bonds roll off its balance sheet as part of its efforts to normalize monetary policy.
After beginning quantitative tightening in June and slowly ramping up in size, the Fed will let $95 billion in bonds mature in September, which will include $60 billion in Treasuries and $35 billion in mortgage-backed debt.
More Treasury bill supply should help ease an imbalance that has left money markets investors struggling with a lack of safe, short-term assets to buy.
“Bill supply should start to pick up in the next few months,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York, noting that this should also reduce demand for the Fed’s reverse repurchase agreement facility, which is seeing daily demand of more than $2 trillion.
TD expects net Treasury bill issuance to increase by $525 billion in fiscal year 2023, which begins in October, following a $173 billion decline in 2022 and a $1.32 trillion drop in 2021.
That compares to expectations that net coupon issuance will grow by $1.08 trillion in fiscal year 2023, after increasing by $1.87 trillion in 2022, and by $2.73 trillion in 2021.
Credit Suisse’s Cohn noted that an increase in bill issuance, and cuts to coupon-bearing debt, should also help to rebalance the Treasury’s debt mix to be more in line with recommendations by the TBAC, which advises the government on its borrowing strategy.
Treasury bills outstanding have fallen to the low end of the TBAC’s recommended 15-20% of total debt, he said. “In increasing bill supply Treasury would be more thoughtfully distributing the supply burden as QT unfolds across investor bases with appropriate liquidity,” Cohn said.